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Quicksilver Surges on Possibility of Deal

Quicksilver Resources soared after the possibility of a take-private deal came to light, but it's debatable how "substantial" the potential premium for any eventual transaction would end up being.



) --

Quicksilver Resources


was the biggest percentage gainer on the New York Stock Exchange on Monday after the possibility of a take-private deal came to light, but it's debatable how "substantial" the potential premium for any eventual transaction would end up being.

"Selling a natural gas story in a depressed natural gas price environment doesn't go far with us," said BMO Capital Markets in an intraday research note following the


. "Using strategic alternatives as a means to an end in this market could short change shareholders, especially as it concerns the still unknown reserve potential in the Horn River Basin (natural gas, plus Exshaw/Bakken oil potential) and Alberta Bakken (multiple pay oil potential)."

The firm, which has a market perform rating on the stock with a 12-month price target of $16, was more down on the idea of striking a deal for some kind of partnership or joint venture now than it was on a potential buyout; although it noted that the jump in the share price could complicate matters in that area.

After running as high as $14.97 earlier in the session, the stock closed up 16%, or $2.04, at $14.65. Volume totaled 17.1 million, more than six times the issue's trailing three-month daily average of 2.6 million. Even with Monday's surge, the shares are down 16% so far in 2010, but they have seen almost a 40% bounce since scraping a 52-week low of $10.53 on May 25.

McNicholl, Lewis & Vlak, a New York-based investment bank, also weighed in on the news, saying it wasn't surprised at the news, given the tough environment. The firm has a buy rating on the stock with a $15 price target.

"The outlook for gas-only names is bleak right now; gas has traded to a 13-month low, supply at 61 bcf

billion cubic feet equivalent/day is the highest it has been since 1973, while industrial and commercial demand continues to falter," MLV said in its note before the opening bell. "In short, if a company does not have an oily play to shift rigs into, it could be a year or more before the market pays much attention to it."

In its statement issued before the opening bell, Quicksilver said members of the Darden family, which founded the Fort Worth, Texas-based oil and gas exploration company in 1963 and took it public in 1999, along with

SPO Partners

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, a Mill Valley, Calif.-based hedge fund firm that owns just shy of 15% of the Quicksilver's outstanding stock, are interested in checking out the company's strategic options.

As a result, the investor group, led by Quicksilver Energy LP, the Darden family's main investment vehicle which owns about 24.5% of Quicksilver's common shares, asked the board for amend the company's rights plan in order to open up talks about the alternatives and let the group evaluate non-public information.

Darden family members still serve in key management roles at Quicksilver with Glenn Darden the president and CEO, and Thomas Darden the chairman, and in its letter, the investor group said it understood any take-private proposal would require an attractive per-share consideration.

"While we are not in a position to provide the Board of Directors with our valuation of the company at this time, and there can be no assurance that a take private proposal by us will be forthcoming, we are fully aware and would expect that any such proposal made by us would involve a substantial premium to the current market price," the group said in its letter.

BMO Capital's stance on the potential for a buyout was somewhat skeptical, noting that based on current consensus estimates, the stock was trading at 5.4X next year's discretionary cash flow "a multiple that doesn't scream 'cheap.'" The firm's own analysis yields a net asset value of around $19 per share for the stock, but it hinted that investor group's could come to a similar conclusion about what the stock is worth right now as Wall Street has.

"We contend, however, that a more sobering reality will set in that very little transparency exists today on the non-proved reserve potential outside the Barnett Shale and, as such, should remain heavily discounted by the market," BMO Capital said. "Staying the course to increase the sample set of drilling results in both plays, and maybe conducting a JV to finance the growth could prove to be a better way to unlock this value, in our opinion."

Quicksilver, whose other significant shareholders include New York-based investment firm Van Eck Associates with a 3.4% stake and


, said its board has established a committee to evaluate any proposals that surface during the process, and it's hired

Credit Suisse


Tudor, Pickering, Holt & Co.

to serve as independent financial advisors.

The company, which

prides itself

on its ability to develop "unconventional" reservoirs is expected to report its third-quarter results on Nov. 8. Wall Street is currently looking for earnings of 16 cents a share in the September period on revenue of $217.6 million.

In the second quarter ended June 30, Quicksilver reported adjusted earnings of $30.4 million, or 18 cents a share, on revenue of $228.6 million, beating the analyst views for a profit of 16 cents a share on revenue of $207 million. In addition to the company's reserve assets, it also holds a 40% stake in

Breitburn Energy Partners LP




Written by Michael Baron in New York.

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